Insights on the Crypto Down Cycle: Edition #8


# Market Overall:

The next two important macro events to watch are the CPI number release on 10th June and FOMC meeting on 15th June. The current consensus points to a 50bp hike in the benchmark rate in the June meeting. The next rate hike announcement will be in July, likely with another 50 bp hike.

On the horizon, ETH2 Merge, i.e the transition of Ethereum chain to Proof-of-Stake consensus, is happening today on its Ropsten testnet. Ropsten is a test chain with the same properties as Ethereum, but not the real chain. $ETH price hasn’t moved significantly.

As we mentioned in the previous issue, we will present a few on-chain indicators which suggest a bottom for Bitcoin is near. The altcoins markets lack macrostructure and usually lag Bitcoin’s. So for altcoins, we find that it is difficult to draw a clear conclusion by looking at on-chain data. We think the altcoins markets depend very much on the liquidity conditions given by the Fed, similarly to the growth equities in the traditional markets.

For Bitcoin, such indicators in the past were largely valid in a loose monetary environment. This time, we need to discount the fact that the Fed hasn’t done fighting high inflation yet. Although it can be argued that fundamentally Bitcoin has some attributes of being a commodity (in fact it is classified as a commodity in the US with futures trading supervised by CFTC), therefore it could benefit from the current commodity and energy inflation.

The chart below shows the Net unrealized PnL of an average Bitcoin investor. It is currently at loss, which suggests investors are generally underwater. Such cases in the past were very good buying opportunities.

Realized price is the average price paid by the markets for their coins. It is showing around $23k per $BTC. Note that there were instances (November 2018, March 2020) where market prices dipped well below the realized prices.

The Hash ribbon indicator assumes that Bitcoin tends to reach a bottom when miners capitulate. That is when weak miners with bad equipment or high electricity price have to sell their coins and shut down operations. When they do so, the network’s hash rate will decline in the short term. Then will regain later by the stronger miners taking up the market shares.
In the chart below, when it switches from dark red to white, it usually signals a good buying opportunity. Currently, we are close to miner capitulation, i.e the chart will likely turn red soon. We still need to wait until it turns from red to white.



# Finally

In the previous post, we also presented our research results on the Bitcoin / Nasdaq downside beta, and we postulated that Bitcoin would decorrelate from Nasdaq from July 2022. So we think the market is finding a bottom in the coming months. However uncertainty around the inflation number and Fed policy means that we are still structurally in a bear market.
Please see here for your reference.

Thank you for reading our post and we hope you are navigating well this very difficult market condition.

Published on June 8th, 2022

***Disclaimer: views given in this channel are for informational purposes only and are not financial advice.
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